Posted on 01 June 2011

I’m going to one-up Mark Twain in the quantity department and spin two yarns about jumping frogs, one which has been frequently told, the other not so much. Neither of them have anything to do with Samuel Clemens’ heralded short story, but both, metaphorically at least, describe our current investment markets and how to think about the future. My first story is the one you’ve all heard about. Put a frog in a kettle of boiling water and he’ll jump out faster and further than any of those blue ribbon winners at the Calaveras County jumping frog contest. Put him in a pot at room temperature, however, slowly turn up the temperature to boiling, and you’ll have frog legs for dinner. This latter, more unfortunate toad temporarily adapted to his external environment, which seemed like a practical thing to do, until – well, until he reached 212° at which point he was cooked. Today’s bond investors are experiencing a similar fate with nary a “ribbet” of complaint.

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All right fellow frogs, so we’re being repressed and shortchanged in order to allow Uncle Sam to balance its books. Whatta we gonna do about it? “Frogs of the world unite,” as Lenin might have said, and so here’s where I harken back to Mark Twain and my second lesser-told frog story. There was this other frog who instead of being tossed into a pot of hot water was left to cool its heels in a pitcher of cold milk. Unable to jump out, he churned and churned those frog legs until eventually the milk turned into butter and the hardened butter allowed him the platform to leap to froggy freedom! Well, let’s get churnin’, fellow frogs. If the U.S. or the U.K. or any other government is going to attempt to boil us alive, let’s make butter! Butter in this instance is what PIMCO characterizes as “cheap bonds.” Potentially confusing, “cheap bonds” is really a simple concept – sort of like the teeter-totter. Any bond, even a Treasury bond, is composed of several pieces – sort of like an atom with its neutrons, electrons, protons, positrons, neutrinos (whoops, don’t wanna go too far here). There’s an interest rate or yield piece, commonly measured by “duration.” There’s a credit piece, typically referred to as a “spread” when you buy a corporate bond. And there’s a volatility piece, a liquidity piece and other little bits and particles that will go unexplained for now. The important point, though, is that if the government is going to artificially repress yield, then an intelligent frog should focus on the parts of a bond that are less repressed! You can, for instance, produce a 1% expected return in today’s market in a number of ways. Buy a repressed 3-year Treasury note at just under 1%, or purchase an A-rated corporate floating rate note (FRN) with little to no durational risk at a 3-month LIBOR +75 basis points spread, currently returning 1%. Which is the better deal? Well, they both appear to lead you to the same place but our cheap bonds argument would maintain that the FRN gets you there with a lot less risk. The credit piece, in other words, is a safer spread than the duration piece.

Journalists, financial advisors, and perhaps even some clients marvel at how PIMCO can be doing so well in 2011 while being underweight the Treasury/durational component of the bond market. Folks – we’re making butter. If you’re being repressed, our strategy is to churn those legs, get out of the pitcher, and above all stay away from boiling pots of water.

Posted on 13 May 2011

In a video accompanying a 40-page slide show describing AIG’s attributes, businesses and financial goals, Chief Executive Robert Benmosche said “there is no more crisis” for the bailed-out insurance company, which now has “lots of growth opportunities,” in his view. Alluding to recent tensions over the size and potential price of the stock offering that AIG and the U.S. Department of the Treasury launched this week, Mr. Benmosche said in the video: “Our sense is we have an incredible valuation opportunity here and we’re just not going to give it away. “If we don’t get the value today, then we’re going to get the value tomorrow… We’re not going to give 100% of the value away and sell it too cheap,” Mr. Benmosche said. [WSJ]

By taking “extraordinary measures,” the U.S. can keep borrowing until Aug. 2 after reaching its $14.29 trillion legal debt limit no later than May 16 unless Congress acts, Treasury Secretary Timothy F. Geithner said.

The Treasury Department will take steps starting this week to provide additional borrowing room, Geithner said in a letter today to Senate Majority Leader Harry Reid, a Nevada Democrat, and other congressional leaders. The Treasury pushed the August deadline back from July 8 “as a result of stronger-than- expected tax receipts,” Geithner said. The May 16 date is unchanged from an estimate he made last month. Geithner said the Treasury on May 6 will stop issuing State and Local Government Series securities. The bonds, known as SLGS, “fund a variety of expenditures, including infrastructure improvements across the country,” he said.

Posted on 12 April 2011

His wife, Christy Mack, started her own business in 2009, called Waterfall TALF Opportunity, which has apparently netted the Macks some pocket change.

Matt Taibbi** writes that in 2009, Christy Mack and Susan Karches launched Waterfall TALF Opportunity, a company with a Cayman Islands address, although the two women did not seem “to have any experience whatsoever in finance.” Taibbi reports that with an initial upfront investment of $15 million, Waterfall TALF received $220 million in cash from the Fed, most of which it used to purchase “student loans and commercial mortgages.” He further explains that the loans were set up so that the investors “would keep 100% of any gains on the deal while the Fed and the Treasury (read: the taxpayer) would eat 90% of the losses.” As of last fall, he continues, $150 million of the total the women borrowed had yet to be paid back.

Posted on 04 April 2011

$$$ “Julian Robertson is reopening Tiger Management to outside investors for the first time in more than a decade, a move that has been anticipated since last summer. The firm is attempting to raise money for the Tiger Accelerator Fund, a co-seeding vehicle that gives investors a piece of the fee revenue and performance at a group of six Tiger-seeded hedge funds.” [AR Magazine]

$$$Not only does Mayo dislike the fact that Parsons seems unwilling to take responsibility for any of Citigroup’s decisions, he seems particularly upset by Parsons chumminess with Treasury Secretary Tim Geithner, whom Parsons refers to as “Timmy” in the recent magazine profile. “His comments indicate unusual and exclusive access to the US Treasury Secretary… and arrogance about the degree of government support and the degree of negative impact that Citi has had on the entire industry,” Mayo writes. [Fortune]

Posted on 30 March 2011

Criticism that “moral hazard” is the main legacy of U.S. taxpayer-funded bailouts is unfair, a Treasury Department official said. “We recognize that moral hazard is a real and significant concern” in the Troubled Asset Relief Program, Timothy Massad, acting assistant secretary for financial stability, said in a hearing before a House Oversight Committee panel today. “But to suggest that it is TARP’s main legacy is to ignore the facts, and to confuse the response to a crisis with the need to address the causes of the crisis.” Massad was responding to criticism from Neil Barofsky, special inspector general for TARP. Barofsky told the House panel’s TARP subcommittee today that the program’s “most significant legacy may be the exacerbation of the problems posed by ‘too big to fail,’ particularly given the manner in which Treasury executed the bailout.” [Bloomberg]

Posted on 25 March 2011

As the Chairman of Citigroup, a position he’s held since February 2009, Dick Parsons sticks out a bit by comparison. Whereas Citi has at times been the world’s largest bloated, lumbering, diversified cathouse where, for a good while, nothing could go right, a highly flammable entity prone to one chaotic moment of shit hitting the fan after the next, that few wanted to get within 100 feet of Parsons is calm. Cool. “Flat-out smooth,” as BusinessWeek describes him (which is why he was hired to be the one to go make nice with Washington, according to Vikram Pandit). The magazine recently accompanied Dick to a jazz club where they got to know him a little better, on a personal level. Here’s what we’ve learned about DP:

* He thinks the city smoking ban sucks: “Michael E. Novogratz, a director of Fortress Investment Group, a New York hedge fund, gives Parsons a hug and presents him with a Montecristo cigar. Parsons looks pleased. “Oh man,” he says, “I wish we could light these up in here.”

* If you’ve lost ass-ton of money, he’s the guy you turn to for a pick-me-up: Novogratz and Parsons exchange condolences about the market, which is zig-zagging with the turmoil in the Middle East. “I lost more money this week than I did in any week in 2008,” Novogratz laments. Parsons tells him not to be so hard on himself. “Nobody knows what’s going on,” he says.

* Charm like this doesn’t need an undergraduate degree: He went to the University of Hawaii, where he partied more than he studied. After four years, he still needed six credits to get his diploma, but he discovered that if he aced his pre-law exams he could get into law school in New York state without a college degree. He did well on the test and was accepted to Albany Law School, where he graduated at the top of his class.

* He’s paid to tell people, “Just relax. Be cool.”: Parsons is not a visionary; no one waits for his announcements or lusts after his products. He is, instead, a master in the art of the relationship, particularly as practiced in back rooms: the pat on the back, the well-told joke, the gossipy anecdote. He’s an old-fashioned fixer who works the system with people skills and political connections. Parsons has spent a good chunk of his professional life assuaging furious employees, aggrieved shareholders, and frustrated regulators. His success is a reminder that, as much as we celebrate creativity and innovation in business, the schmoozer abides.

* He’s on a nickname-basis with Tim Geithner: Parsons had a chummy relationship with the Treasury Secretary. “Timmy Geithner would say, ‘Call me directly, because this is too important an institution to go down,’” Parsons says. According to the Treasury Secretary’s schedule, available online, Geithner spoke frequently with Parsons in 2009.

* He has only ever freaked out once in his life: In the summer of 2002, he called Edward Adler, the company’s former head of corporate communications and now head of the strategic communications practice at MediaLink, a consulting group. “The wheels are coming off the company!” Parsons told him. Adler was startled by his boss’s uncharacteristic agitation. “He was freaking out,” Adler recalls. “Dick’s a calm guy. He never freaks out.”

* He’s a ladies man: The company’s depressed stock price drew the attention of activist investor Carl Icahn, who built up a 6 percent stake and tried to pressure the company to break itself up. One of the themes of his campaign was that Parsons was a glad-hander rather than the hard-core fixer that AOL Time Warner needed. Parsons fought Icahn with charm. He started dropping by Icahn’s office in the GM Building. “I got to know his secretaries,” Parsons says. “They are always the keepers of everything.”

* If you’ve got a birthday, it’s getting celebrated whether you like it or not!: On one visit Parsons found Icahn’s assistants glum at their desks. It was the boss’s birthday. The women had a cupcake with a candle in it and they wanted to sing Happy Birthday, but they said Icahn wouldn’t hear of it. He was brooding behind closed doors in his office. Parsons marched into his adversary’s office with the secretaries and started a round of Happy Birthday. At first, Parsons says, Icahn objected vigorously, but finally he calmed down and enjoyed his cake.

Posted on 09 March 2011

Bill Gross has unloaded all U.S. government-related holdings, including Treasurys, in the world’s biggest bond fund. Mr. Gross, founder and co-chief investment officer of Newport Beach, Calif.-based Pacific Investment Management Co., slashed such holdings to zero by the end of February from 12% in January in the Total Return Fund, a Pimco representative said Wednesday. The selling reflects Mr. Gross’s stance as a major Treasury bond bear. He has fretted about the U.S. fiscal deficits in recent months, saying that a 30-year bull run in the Treasury market was over. [WSJ, Related: Bill Gross Tells Investors About The Time He Stiffed A Waitress]

Posted on 02 March 2011

Bill Gross suggests marking it down on your calendar– as D-Day, The Sequel.

What I would point out is that Treasury yields are perhaps 150 basis points or 1½% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%. This conclusion can be validated with numerous examples: (1) 10-year Treasury yields, while volatile, typically mimic nominal GDP growth and by that standard are 150 basis points too low, (2) real 5-year Treasury interest rates over a century’s time have averaged 1½% and now rest at a negative 0.15%! (3) Fed funds policy rates for the past 40 years have averaged 75 basis points less than nominal GDP and now rest at 475 basis points under that historical waterline.

As a counter, one would argue (and I would partially agree) that the U.S. and indeed developed global economies must keep yields artificially low for some time if post Lehman healing is to take place. But that of course is the point. By eliminating QE II, the Fed would be ripping a Band-Aid off a partially healed scab. Ouch! 25 basis point policy rates for an “extended period of time” may not be enough to entice arbitrage Treasury buyers, nor bond fund asset allocators to reenter a Treasury market at today’s artificially low yields. Yields may have to go higher, maybe even much higher to attract buying interest.

Investors should view June 30th, 2011 not as political historians view November 11th, 1918 (Armistice Day – a day of reconciliation and healing) but more like June 6th, 1944 (D-Day – a day fraught with hope for victory, but fueled with immediate uncertainty and fear as to what would happen in the short term). Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction.

Posted on 01 March 2011

Goldman Sachs Says It Lost Money On 25 Days Of Trading In 2010 (Bloomberg)
After incurring losses on trades during 12 days in the first 9 months, the full-year figures indicate that Goldman Sachs lost money on 13 days in the fourth quarter. The firm’s traders also made $100 million or more on 68 days in 2010, down from the record 131 days in 2009, according to the New York- based company’s annual 10-K filing with the Securities and Exchange Commission. Traders exceeded the firm-wide “value-at-risk” limit, or VaR, on one occasion during 2010 “to facilitate a client transaction,” according to the filing.

Goldman Puts Figure On Possible Litigation Costs (WSJ)
Goldman could lose as much as $3.4 billion in damages and other litigation-related matters involving securities it underwrote in the last few years for which the purchasers are now suing to recover losses or to force the firm to buy them back. In a securities filing Tuesday, Goldman estimated that the figure, in the upper range of estimates, was “reasonably possible.”

Fannie, Freddie Caught In Vicious Circle On Dividends (WSJ)
The requirement that both companies pay a 10% dividend on preferred shares—which the U.S. government receives for its infusions after taking over Fannie and Freddie in 2008—costs them about $15 billion a year at the current rate. In the last two quarters, the firms have paid $7.5 billion in total dividend payments, while receiving injections of $5.7 billion to help keep them in business. The dividends could force Fannie Mae and Freddie Mac to keep asking the Treasury Department for more money even after the companies get back into the black, helped by lower losses on mortgages and profits from newer loans. U.S. officials have said those payments are an appropriate way to repay taxpayers.

Jack Welch: Obama Move To The Center Is All Talk So Far (CNBC)
“The tack to the center is verbal, it’s not actionable,” Welch said. “Let’s hope he’s moving to the center,” he added. “But from what I see—unionizing 43,000 TSA workers on a Friday and giving a speech (to the US Chamber of Commerce) Monday morning—show me the money.”

Sheen’s Publicist Quits As Actor Says On TV He’s Drug Free (Bloomberg)
Stan Rosenfield, the publicist for Charlie Sheen, said he resigned from the role because he is no longer able to work effectively for his client. In an interview with NBC’s Jeff Rosen, Sheen said he would return for a ninth season of “Two and a Half Men,” the most- watched comedy on TV, only if the producers give him a raise to $3 million an episode. In response to a question, Sheen acknowledged receiving roughly $2 million in salary and royalties from reruns. “I’m underpaid right now,” Sheen said on the “Today” show, describing himself as a “rock star from Mars.”

Treasury To Sell $2.7 Billion Of Ally Trust Securities (AP)
The Treasury hopes to take back more taxpayer money through an initial public offering of the former General Motors finance arm, which received $17.2 billion during the financial crisis. The government owns 74 percent of the company through holdings of common stock.

JPMorgan Twitter Deal Is Said To Value Start-up At $4.5 Billion (Bloomberg)
The bank has invested in a fund that has bought about $400 million in Twitter Inc. shares, valuing the blogging service at as much as $4.5 billion, three people with knowledge of the matter said. The fund, which has more than $1 billion, is being run by Twitter investor Chris Sacca.

Muni Industry Optimistic About State Revenues Recovery (FT)
Many of those surveyed in a poll by RBC Capital Markets have become more confident about the effect of a US economic recovery on local tax revenues. Some 27 percent of the 100 municipal bond issuers, bankers and lawyers questioned at a recent conference sponsored by The Bond Buyer expect it will take two years for state and local government revenues to return to pre-crisis levels. This compares with just 3 percent in a similar survey last October.